Attractive near-shore M&A opportunities in added-value BPO categories

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1 Global Business Process Outsourcing M&A update Summer 2014 Attractive near-shore M&A opportunities in added-value BPO categories The global business process outsourcing (BPO) industry is changing, from offshore to nearshore and further diversification to value added services. In order to meet the needs of more demanding clients, BPO providers need to have scale, broad industry expertise and the latest technology. The key observations from our research: Targeted growth with new and existing clients IT outsourcing services and industry-specific BPO activities still dominate the majority of BPO services. However, this is a highly competitive market and the pressure on margins means that traditional providers are targeting higher growth, higher margin services, underpenetrated sectors and the under-served mid-sized corporations which are increasing outsourcing. M&A is often the fastest way to acquire capabilities and access to these markets. Structural change through M&A BPO providers are transitioning away from traditional business models that are focused on labour cost reduction. They are using bolt-on acquisitions to provide end-to-end, sector vertical specific value added services. Private equity is an important investor Private equity (PE) is attracted to the BPO industry and is targeting business models with long-term customer relationships and high levels of recurring revenues operating in a fragmented sector which facilitates a buy and build strategy. The BPO market continues to grow with companies outsourcing more and more of their services. BPO providers are actively looking to acquire niche players with innovative services and access to new geographical markets to secure their market position and margins. Jan Willem Jonkman Managing Partner Capitalmind Corporate Finance

2 BPOs are looking to add additional and innovative services Industry Trends The US$952 billion global BPO industry is characterised by strong growth prospects with individual segments forecast to grow with a CAGR between 3.5% and 7.6% from 2013 to 2017 (see Figure 1). Whilst operational efficiency is still an important growth driver, BPOs are looking to add additional and innovative services which clients perceive as adding value. Major trends in the industry include: Delivery models evolving Declining margins from traditional outsourcing activities, due to increasing competition and an increasing focus on quality and capabilities, means that some BPOs are targeting higher margin services such as procurement and sourcing, talent acquisition and big data. For example, Canada s Telus International has invested to transform its procurement and supply chain operations in order to be able to win large contracts. Cost savings are no longer the primary reason for companies to consider outsourcing. Competitiveness, scalability and innovation are also playing an increasingly important role. As clients Multi-channel approach, Big Data and new technologies are essential for delivering added value services to clients. Jac Vermeer CEO, IPG International increasingly outsource more strategic functions, BPOs have the opportunity to capture a greater proportion of client spend and increase customer loyalty. Mid-sized clients increasing outsourcing Mid-sized companies are using outsourcing to overcome the rising costs of meeting compliance and regulatory obligations. Whilst large corporates are well served by BPOs and the market is becoming saturated, mid-sized corporates are an under penetrated customer base. Figure 1: Market size by segment (US$bn) and forecast growth US$bn Size (US$) CAGR % 6% 4% 2% 0% CAGR Professional IT Services Industry specific BPO Source: HfS Research, 2013; KellyOCG 6 Key Trends in Outsourcing Infrastructure Other IT services Application development & maintenance Customer relations Human resources Finance & Accounting 2

3 At the same time, clients' growing confidence in third party service providers is enabling them to divest their holdings of captives and concentrate on their core business. For example, Cognizant has acquired a number of captives including CoreLogic India, the India-based captive operations of CoreLogic, for US$50 million, and ValueSource Technologies from Belgian bank KBC Group. Onshoring and nearshoring increasing Significant rises in wages in China and India and the operational and reputational risk associated with miscommunication issues is leading a number of BPOs to move some operations back to home and neighbouring countries ( nearshoring ). For example, BPO provider Teleperformance serves the Czech Republic market by nearshoring from Poland and Slovakia. New clients in emerging markets The domestic markets in India, China and some South American countries are developing quickly. Some of the companies that provided services to corporates in the US or Europe are now increasing the number of domestic clients. Increasing trend to onshore and nearshore BPO Figure 2: International trends USA Largest BPO market globally with 40% market share worth over $400 billion Market is moving away from cheaper is better to on-shoring services as many IT tasks become more automated and outsourcing moves into strategic initiatives EMEA Second largest BPO market globally worth over $300 billion. The UK and Finland are the most mature markets, outsourcing 19% and 17% respectively of all services In-house operations are generally in decline as corporates are increasingly outsourcing standardized BPO activities. There is strong growth potential in the application development and maintenance (especially in Germany and France), finance and accounting and HR segments Latin America The Latin-American market accounts for 5% of the total BPO market and is valued at $44 billion Due to an increasing interest from US clients in near-shore outsourcing services, the continent is experiencing strong growth and expects a CAGR of 7.4% until 2017 Asia Pacific A maturing market with countries such as China and India becoming less attractive for US and EU offshore clients due to higher wages and increased automation in IT. The high level of industry expertise means that Chinese and Indian BPO providers are now focusing on onshore outsourcing activities India s competitiveness is being threatened by wage inflation and the rise of other locations including the Philippines and China as alternative sourcing destinations. Large Indian outsourcers are looking for acquisitions in US and Europe to be able to provide services near to clients home countries 3

4 Scale is a key consolidation driver M&A Activity Leading BPO service providers are making strategic acquisitions to gain scale, geographical coverage and broaden or enhance their service offering in order to meet clients demands and to protect margins and increase revenues (see Figure 3). Gain scale A number of deals are being driven by the strategic need to be able to provide a broad service offering across end markets to multinational clients. Convergys recent US$820 million acquisition of US-based Stream Global Services creates the second largest contact centre services provider globally. Stream's higher margin complementary customer portfolio expands its platform across several global markets including Latin America and EMEA and industries such as technology. NCO Group, backed by US-based One Equity Partners, has made a number of call centre acquisitions including the US$488 million merger with APAC Customer Services. With combined revenues of approximately US$2 billion, APAC and NCO will be a fully scaled BPO provider in both the CRM and ARM segments. US TeleTech Holdings acquisition of Californian-based WebMetro, one of the 25 largest search marketing agencies, enables TeleTech to enhance its multi-channel customer acquisition capabilities. Some BPO providers are consolidating their home markets. For example, the leading hosting businesses in the Netherlands ASP4all Bitbrains Group, IS and IT-Ernity are using acquisitions to become the market leaders in their respective sectors. Figure 3: Top 20 BPO companies Revenues (US$m) EV/EBITDA Customer Contact Services Finance & Accounting Human Resources IT / Hosting Helpdesk & Tech support Sales and Logistics Media & Marketing Services Analytics & Consultancy Facility Management, Security & Procurement Payment Services/ Recovery Legal Back Office Support Engineering Accenture 28, x x x x x x x x Telus Intl. 11, x x x x x x x x Synnex 11, x x x x x x CGI Group 10, x x x x x x Cognizant 9, x x x x x x Infosys BPO 8, x x x x x x x x x Capita 6, x x x x x x x x Arvato (Bertelsmann) 5,613 - x x x HCL Technologies 4, x x x x x x Teleperformance 3, x x x x x x Temp Holdings 3, x x x x x x x x West Corp 2, x x x x Genpact 2, x x x x x x x x x x Convergys 2, x x x x x x x x ACS INC (Xerox Company) 1,356 - x x x x x Teletech Holdings 1, x x x x x x x Atento 1,247 - x x x x x NCO Group Inc 1,216 - x x x x x x x x x x Sitel 1,118 - x x x x Sutherland Global Services 1,074 - x x x x x Source: Capital IQ 4 This list includes BPOʼs active in different sub-segments of the BPO market. Beside these companies there are several large specialized IT outsourcing firms like Wipro, Terremark, Savvis, RackSpace and InterXion.

5 Acquire niche services Large providers are targeting niche services which enable them to access or strengthen their offering in high growth verticals and higher margin support areas. TeleTech Holdings acquired Technology Solutions Group, a small communications solutions provider, to gain access to its strong presence in the healthcare sector. Serial acquirer Accenture s 2013 acquisition of majority stake in Vivere Brasil, which provides it with access to Brazil s high growth mortgage market, was followed by the US$375 million acquisition of US-based procurement BPO specialist Procurian. Acquire global capabilities More BPO providers now serve clients that have operations based in locations with different regulatory and cultural operating environments. Cross-border deals are often driven by clients demanding a nearshore or onshore capability in the their home territory. Acquisitions are the fastest way to acquire local expertise. Access to bilingual skills, closer times zones and cultural similarities are supporting nearshore M&A activity. Convergys' 2013 acquisition of New Zealand-based Datacom will add 15 Asian languages to Convergys' language capabilities and 1,000 employees to its Southeast Asia platform. Teleperformance acquired Metis Group, one of the leading outsourced contact centres in Turkey, to develop both the local market as well as nearshore solutions. Affilated Computer Services, the IT outsourcing and consulting arm of Xerox, entered the Italian market via its acquisition of the call centre BPO assets of Italy s Innova Consulting. This followed the acquisition of Dutch Unamic, the largest privately-owned customer care provider in the Benelux, which added regional market expertise in Western Europe and Turkey. The combination of a focus on added value services and slowing organic growth in India means that large Indian outsourcers are acquisitive in the US and Europe. For example, Cognizant acquired Texas-based accounts payable service provider SourceNet Solutions from BNY Mellon and MediCall, a provider of outsourced clinical services with headquarters in US and major operations in the Philippines. Transaction multiples for BPOs differ between sub-segments within the sector. We see EBITDA multiples of 5-7x for pure call centres to 9-11x for infrastructure players. Acquisitions in niche services enable large players to strengthen their offerings CASE STUDY: IPG International Mergers Alliance s partner in the Benelux advises the shareholders and management of IPG International, the leading Benelux contact centre provider, on its international growth strategy. IPG, owned by the Koramic Investment Group, has used a buy and build strategy to increase domestic market share, enter new markets and expand into new verticals. In 2013, IPG acquired SNT Belgium to become the largest contact centre in Belgium. This transaction, along with the acquisitions of BizzXsell (outbound services with a focus on the media industry) and Call Center Benelux (the Netherlands-based contact centre specializing in technical service and multi-channel support) are part of IPG s growth strategy and the development of its international operations. IPG s strategy includes onshore, nearshoring and offshoring, with locations in the Netherlands, Belgium and Morocco and active in France. Germany is also a potential new market. Added value is delivered by adding new technologies, like social customer care tools, voice analytics, further automation and a multi-channel approach to service clients with the highest quality. In 2013, IPG doubled its revenues to 100 million and attributed 85% of the revenue growth to acquisitions. 5

6 Private equity is facilitating buy and build strategies Private Equity PE firms from the US and Europe are active in the sector. PE is attracted to business models with long-term customer relationships and high levels of recurring revenues operating in a fragmented sector which facilitates a buy and build strategy. Larger PE houses are active. APAX Partners has acquired Garda World Security Group and TIVIT, a leading integrated IT and BPO services provider in Latin America. Bain Capital has acquired a 30% stake in Genpact, an Indian business processing outsourcer, for US$1 billion and the purchase of Atento, Telefonica s call centre business, for US$1.34 billion. Mid-market PE is also active. Charterhouse Capital Partners-backed Webhelp s 2013 acquisition of call centre HEROtsc enables the French contact centre operator to expand into the UK. Philippines-based SPi Global, acquired by CVC Capital-Partners in 2013, recently completed the acquisition of Bachieve International, which enables SPi to gain access to China. PE has exited to both strategic buyers and financial investors. In 2013, ClearLight Partners sold US-based The Outsource Group, a provider of revenue management services in the healthcare sector, to Parallon Business Solutions, a healthcare business operational services provider. UK diversified services provider Serco s acquisition of Indian BPO Intelenet was an exit for Blackstone and Barclays. Blackstone s 2013 acquisition of Dutch Intertrust Group was an exit for Dutch investor Waterland Private Equity Investments. Vitruvian Partners has made a strategic investment in the recently merged ASP4all Bitbrains Group. The investment will help accelerate the integration of the two companies and will facilitate international expansion. Prospects for M&A and the industry We expect that M&A activity will continue at its current level for the next few years given all the factors outlined above. In particular we expect to see: BPO providers continuing to use M&A to expand into high growth verticals including financial services, healthcare, oil & gas and retail. Large BPOs continuing to target niche players providing specialist services in order to gain scale, broader geographic coverage, acquire technology, access new clients and offer higher value services. A number of providers establishing leading-edge technological platforms that enable delivery of complex services and which can be scaled up without significant cost increases. Domestic companies increasing their onshore services offering. 6

7 Figure 4: Selected BPO deals Deal Value Date Target company Country Target activities Acquirer Country (US$m) July-14 ASP4all Bitbrains Group Netherlands One of the leading providers of managed hosting and Vitruvian (PE) UK nd cloud services in the Netherlands June-14 Stok UK Limited UK Logistics and fulfilment specialist providing hospitals Arvato AG Germany nd and medical product manufacturers May-14 Bachieve International Inc. China BPO and ITO services provider SPi Global Holdings, Inc. Phillippines nd April-14 Stream Global Services Inc. US Business process outsourcing services provider Convergys Corporation US 820 Feb-14 SNT Netherlands Customer contact centre Webhelp France nd Jan-14 IBM, Worldwide Customer Care US Business process outsourcing provider Concentrix Corporation US 490 Business Process Outsourcing Services Business Jan-14 GXS Group Inc US B2B cloud integration services providers Open Text Corporation Canada 1,165 Feb-13 Telecom Service Centres Limited UK Customer management solutions provider Webhelp, SA France 120 Apr-13 Datacom Group Limited Malaysia Information technology and business process Convergys Corporation US 21 outsourcing providers Apr-13 Intertrust International Netherlands Trust and administration services providers The Blackstone Group US 882 Topholding B.V. to corporate clients May-13 IT-Ernity Netherlands Internet services and hosting solutions GMT / Veronis Suhler UK / US nd Stevenson Dec-13 Procurian Inc. US Procurement outsourcing solutions providers Accenture plc Ireland 375 Jun-12 Globe Op Financial Services, SA UK Providers of BPO, financial technology and analytics to SS&C Technologies Holding US 824 hedge funds and other sectors of the financial industry Oct-12 Genpact Limited Bermuda Business process outsourcing provider Bain Capital US 1,000 Oct-12 Lodestone Holdings Switzerland Consulting firm advising companies on strategy, Infosys Lyd India 331 process optimization and IT transformation Nov-12 Garda Corp Security Corp Canada Physical security, risk consulting and cash Apax partners UK 1,050 logistics service providers Jan-11 Decision Insight Information US Information and infrastructure products and services TPG Capital US 849 Group providers for financial and legal professionals Mar-11 Unamic/HCN Netherlands Customer care provider in the Benelux Affiliated Computer Services US nd Mar-11 Intelenet Global Services Pvt. Ltd. India Third party business process outsourcing Serco Group UK 641 service providers in India and Internationally May-11 Headstrong Inc. US Global consulting and IT services company Genpact Limited Bermuda 550 Aug-11 Raet BV Netherlands Providers of information technology solutions in CVC UK 576 the field of human resources and payroll services Oct-11 Apac Customer Services US Provides customer care outsourcing solutions and Expert Global Solutions US 488 business process outsourcing services Source: Capital IQ / Mergermarket 7

8 Selected Mergers Alliance Deals Acquired Sold controlling stake in Sold Partly sold to PE firm A subsidiary To To CASA Capital Management Contacts Specialist advice on call For information on sector trends and M&A in Business Process Outsourcing Jan Willem Jonkman Managing Partner, Netherlands Telephone: [email protected] Nuccia Cavalieri Partner, Italy Telephone: [email protected] Michel Degryck Managing Partner, France Telephone: +33(0) [email protected] Horacio Facca Managing Director, USA Telephone: +1 (617) [email protected] Leonardo Antunes Managing Director, Brazil Telephone: [email protected] Geoffrey Morphy Managing Director, Canada Telephone: [email protected] Owen Hultman General Manager, Japan Telephone: [email protected] Jamie Hope Partner, United Kingdom Telephone: +44 (0) [email protected] Bruno Ruiz Arrue Partner, Spain Telephone: [email protected] Piotr Olejniczak Director, Poland Telephone: [email protected] Oliver Lennertz Partner, Germany Telephone: [email protected] Fausto Garcia Partner, Mexico Telephone: [email protected] Mark Bond Managing Partner, Russia Telephone: [email protected] Onur Kurugol Vice President, Turkey Telephone: [email protected] Ajoy Lodha Partner, India Telephone: [email protected] Join the mergers and acquisitions discussions With a dedicated Business Process Outsourcing team, the Mergers Alliance partners are expertly placed to offer advice. In particular, we offer: Advise on structuring and completing deals in the Business Process Outsourcing market Identifying acquisition opportunities in emerging markets Information on sector trends and valuations Access to corporate decision makers and owners